01/10/2013

The recovery of the All Ordinaries Accumulation Index (share prices plus dividends) to exceed its pre-GFC high holds valuable lessons for investors.

These lessons reinforce some of the fundamentals of sound investment practice including the benefits of sticking to a carefully-constructed, long-term plan while ignoring any temptation to just follow the investment herd.

The All Ordinaries Accumulation Index reached 42,951 points this month, beating its previous high of 42,946 set on November 1, 2007. (The All Ordinaries Index and the S&P/ASX200 Index – which do not count dividends – climbed to five-year highs this month yet remain significantly below their pre-GFC highs.)

Investors who had followed the herd in the depths of the GFC by jumping out of shares into all-cash portfolios are likely to have paid a high price.

Such attempts at timing the market led to many investors selling at a loss when the market was at or near a GFC low only to buy back at high prices after the market had turned upwards.

The accumulation index shows the possible rewards for investors who reinvest their dividends. An investor who concentrates only on share price movements only sees part of the picture – particularly given the value of Australian franking credits.

A look at the long-term performance of superannuation funds with diversified portfolios also underlines the benefits of setting and keeping to a long-term target asset allocation for your portfolio.

The latest report by superannuation fund researcher SuperRatings tracks how $100,000 invested 10 years ago in a balanced super fund would have grown. (It is assumed that the fund produced average returns for a balanced fund. SuperRatings defines a balanced fund as one with 60-76 per cent of its portfolio in growth assets.)

The $100,000 would have reached a pre-GFC peak of $168,596 by October 2007 before falling to a GFC low of $126,401 in February 2009 and then more than recovered to $192,066 at the end of August this year – $65,665 above the GFC low.